In this paper we show that dual-class shares can be an answer to agency conflicts rather than a result of agency conflicts. When a firm issues voting shares to raise funds, an incumbent manager?s control rights are diluted. This increases the risk that an incumbent could lose control of the firm and therefore, could lose the associated benefits of control.
Thus, the incumbent may forgo positive NPV investments in an effort to maximize his expected wealth. Non-voting shares allow a firm to raise funds without diluting manager?s control rights; hence, it can alleviate the underinvestment problem. But non-voting shares facilitate entrenchment and therefore, reduces value-enhancing takeover activities. Also, non-voting shares dilute dividends per share. We obtain conditions under which the benefit of using non-voting shares, that is, higher firm value due to higher investment outweighs the entrenchment and dividend dilution costs. Others have shown that deviations from ?one share-one vote? can be optimal, but our study is the first to integrate the dualclass decision into the rich body of research on capital structure and underinvestment.
This paper describes different forms of ownership across countries and how these forms influence the way companies are governed. In most stock markets in the world, listed companies frequently have a controlling shareholder, usually a family....Read more
This article surveys the recent literature on boards of directors and the interplay between director incentives and CEO incentives. The primary focus is on how the incentives and other characteristics of directors, boards and CEOs interact to...Read more
Corporate law and corporate governance are often called upon to address problems in international and transnational contexts. Financial markets are global and the problems in those markets are often similar, if not identical, even though the...Read more
Voting outcomes can differ from underlying preferences due to strategic selection into voting. One explanation for such selection effects is lower participation of shareholders with popular preferences (free-rider effect) relative to those with...Read more